Southwest Airlines, the world’s most successful airline, is under fire. Hardline activist and investor Paul Singer and his company Elliott Management want to fire the top managers and most of the directors. This is no surprise: The stock is still at the same level as it was ten years ago. CEO Bob Jordan knows he is in the firing line. “Our overall results are not where they should be,” he told Wall Street analysts in July. “They do not reflect what we can do.” His answer, appropriately grand in scope, is “a strategic transformation of the company,” a phrase that triggers both concern and confidence.
Now customers, employees, alumni, competitors, shareholders and admirers are all asking the same question: What would Herb do?
Herb Kelleher, who died five years ago, was Southwest’s co-founder and longtime CEO, creating the company’s uniquely successful model. It made Southwest the largest U.S. domestic airline, bigger than American Airlines, Delta Air Lines or United Airlines. From the start of operations until Covid disrupted it, it was profitable for 47 consecutive years – a record no other airline in the world has matched. During the same period, all three of its main competitors went bankrupt at least once.
But times have changed, and Jordan is undoing key elements of Kelleher’s model. Singer wants to go much further, but the differences between the two are more of degree than direction. Southwest became the world’s most successful airline by being radically different, and now Jordan and Singer want to save it in their own way by going in the opposite direction – by making it more like other airlines.
The most important change that Jordan and Singer agree on is that Southwest will have to give up two of the model’s most sacred elements: only one class of service and no assigned seats. And they may well be right about that.
Other airlines make the majority of their profits from extra compartments in economy, business and first class, so Southwest is missing out on a huge opportunity that wasn’t as lucrative back when airlines didn’t have today’s profit-maximizing algorithms for setting airfares.
Without assigned seating, Southwest can board its planes quickly, allowing planes to turn around faster than other airlines and fly more legs per day. But “customers are simply taking fewer short-haul flights today,” Jordan says, “and as they fly longer distances, the importance of an assigned seat increases.” In addition, research found that 80% of Southwest customers prefer an assigned seat, and customers who leave Southwest for another airline cite available seats as the main reason.
The danger is that the Southwest model is a complicated machine, so fiddling with any one element will affect the others.
Assigned seating? Southwest doesn’t offer it, but passengers can choose a seat in advance for a fee. Such “boarding ancillary products,” as the company calls them, bring in nearly a billion dollars annually. Assigned seating will eliminate that revenue.
A premium class would require more legroom, which means fewer seats overall, and Southwest’s model requires a lot of seats. That’s why the airline doesn’t serve meals; no meals means no galley, which leaves room for another row of seats. JP Morgan Chase analyst Jamie Baker wonders if Southwest will also add more non-premium seats by reducing the distance between rows. If so, he writes in a recent report, “a more punishing product could lower returns than today. We simply don’t know.”
This brings us back to what Herb would do. He was always for change – fast – if necessary. “We reject the idea of long-term planning,” he told me years ago. “We are as fast as a cougar. A plan for what we will do in ten years will almost certainly be obsolete in the next six months.”
But his passion was the intangible element of the Southwest model and, in his view, the most important one by far. It was the Southwest culture. When I saw him on stage at a Assets I deliberately provoked him at the conference by listing the basic elements of the Southwest model and then saying, “That’s the secret sauce. What does culture have to do with it?”
The steam didn’t shoot out of his ears, but almost. “Culture has everything to do with it,” he replied, “because my competitors can copy everything you just said, but they can’t copy our culture and they know it.”
Those weren’t just good words. Throughout Southwest’s history, company culture has been a critical factor in making the model work. Turning a plane around in 20 minutes — fueling, inspecting, loading and unloading baggage, deplaning and boarding passengers, fixing breakdowns — is never easy and sometimes requires employees to do work they don’t normally do. Whether they do that work depends on the company culture. Other key components of the package — the lack of assigned seating, meals and inter-airline baggage transfers — don’t excite passengers, but customer-facing employees can make everything look OK in Southwest’s company culture. When a flight attendant hides in an overhead bin during the turnaround and then shouts “Surprise!” when a passenger opens it, or sings a made-up song called “On Time Landing in Tulsa” toward the end of a flight, you can’t help but smile.
That is the critical financial value of culture. So it is notable that on Southwest’s recent earnings call, none of the company’s six executives mentioned it. Nor did any of the Wall Street analysts or media reporters who participated in the call. Paul Singer’s 51-slide presentation laying out his case for firing Southwest’s top executives and most of its directors does not mention culture once.
We can never know what Herb would do, but we can guess what he would focus on. “My biggest concern is that through ineptitude, carelessness, misunderstanding, we will lose the esprit de corps, the culture, the spirit,” he told me long ago. “If we ever lose that, we have lost our most valuable competitive asset.”
As the Southwest saga continues, it is worth keeping an eye on the element that competitors seem to have forgotten.
